Shelley Magness & Colo. State Bank & Trust Co. v. Ariz. Registrar Contractors

• Decision Date: 08 April 2014
• Docket Number: No. 1 CA–CV 13–0184.,1 CA–CV 13–0184.
• Citation: 234 Ariz. 428,323 P.3d 711
• Court: Arizona Court of Appeals
• Parties: Shelley MAGNESS and Colorado State Bank & Trust Company, N.A., Co–Trustees of The Shelley Magness Trust UDA 6/25/2000, Plaintiff/Appellee, v. ARIZONA REGISTRAR OF CONTRACTORS, Defendant/Appellant.

234 Ariz. 428

323 P.3d 711

Shelley MAGNESS and Colorado State Bank & Trust Company, N.A., Co–Trustees of The Shelley Magness Trust UDA 6/25/2000, Plaintiff/Appellee,

v.ARIZONA REGISTRAR OF CONTRACTORS, Defendant/Appellant.

No. 1 CA–CV 13–0184.

Court of Appeals of Arizona,

Division 1.

April 8, 2014.

Davidson, Lester & Kaffer, PLLC, By Frederick E. Davidson, Brian G. Lester, Chad R. Kaffer, Scottsdale, for Plaintiff/Appellee.

Arizona Attorney General's Office, By Michael Raine, John R. Tellier, Phoenix, for Defendant/Appellant.

Judge MICHAEL J. BROWN delivered the Opinion of the Court, in which Acting Presiding Judge MARGARET H. DOWNIE and Chief Judge DIANE M. JOHNSEN joined.

OPINION

BROWN, Judge.

¶ 1 The Arizona Registrar of Contractors (“ROC”) appeals the superior court's order directing the ROC to issue payment from the Residential Contractors' Recovery Fund (“the Fund”) to Shelley Magness and Colorado State Bank & Trust Company, as co-trustees of the Shelley Magness Trust (“Magness”). For reasons that follow, we vacate the superior court's order and remand for further proceedings.

BACKGROUND

¶ 2 In September 2008, Magness and Lendo Management LLC (“Lendo”) entered a contract for Lendo to construct a “bath addition” to a house owned by Magness for the sum of $49,375.¹ The contract stated “that additional work could be undertaken in accordance with Change Orders.” Two months later, the parties entered a second contract that provided for additional remodeling work to be performed for the sum of $38,899 and included the same change order clause as the first contract.

¶ 3 Work on the project began in October 2008, and continued through December 2009. During construction, Magness approved numerous change orders. By late December 2009, Magness had paid Lendo $366,123.27. At that point, Lendo stopped working even though all the contracted work was not yet completed. Magness unsuccessfully attempted to contact Lendo to seek redress for the uncompleted work and eventually paid other contractors to finish the project.

¶ 4 In April 2010, Magness filed a complaint against Lendo with the ROC, which issued a citation naming Lendo. When Lendo failed to file a response, an Administrative Law Judge (“ALJ”) entered a decision and order adopting the allegations of the complaint and revoking Lendo's license.

¶ 5 In November 2011, Magness filed a complaint against Lendo in superior court alleging numerous claims, including breach of contract, unjust enrichment, and conversion. Magness also named the ROC as a defendant, alleging it was entitled to recover from the Fund based on claimed damages of $17,461.45 ($8,619.40 for unperformed work, $1,030.00 for reimbursement of charges paid to Lendo for completion of the unperformed work, and $7,812.05 for reimbursement of funds paid to Lendo that should have been paid to subcontractors and suppliers).

¶ 6 In its answer, the ROC responded it was “without sufficient knowledge to form a belief as to whether [Magness] is entitled to recovery from the Fund [.]” The ROC also maintained that any award from the Fund is statutorily limited to “the actual damages suffered by the claimant as a direct result of the contractor's violations” and “[o]nly those persons injured as defined by [Arizona Revised Statute (“A.R.S.”) section] 32–1131 are eligible for recovery from the Fund.” The ROC requested that the court deny Magness any recovery from the Fund unless Magness could demonstrate eligibility under A.R.S. §§ 32–1131 and –1132(A) and compliance with A.R.S. § 32–1136.

¶ 7 Lendo did not answer as required by Arizona Rule of Civil Procedure (Rule) 12(a)(1)(A) and Magness filed an application for entry of default and motion for entry of judgment by default without a hearing. The superior court entered a default judgment against Lendo. As relevant to the Fund claim, the court awarded Magness damages against Lendo in the amount of $17,461.45. In response, the ROC filed a notice stating it did not object to the entry of default judgment against Lendo, but that it did “not waive any objections it has to a payout from the [F]und” and “reserve[d] the right to object to an order directing payment from the Fund for any other applicable reasons,” citing A.R.S. §§ 32–1131 –1140.

¶ 8 Magness then filed an application for an order directing payment from the Fund. The ROC objected, asserting Magness's application did not satisfy statutory requirements because Magness failed to (1) establish “eligibility for payment” as a “person injured” because the house was owned by a trust; (2) demonstrate that Lendo held a contractor's license at the relevant time period; or (3) limit the claim to “actual damages.” The ROC requested that, at a “minimum,” the court “order a hearing requiring [Magness] to prove these matters.” The superior court entered an unsigned minute entry granting Magness recovery from the Fund in the amount of $14,067.39 ($17,461.45 less $3,394.06 that Magness had recovered from Lendo's contractor's bond). The ROC moved for reconsideration, requesting an evidentiary hearing to resolve factual issues relevant to Magness's eligibility to recover from the Fund. The superior court summarily denied the ROC's motion and entered a signed order directing payment from the Fund. The ROC timely appealed.

DISCUSSION

¶ 9 The ROC argues the superior court erred by entering an order of payment because Magness failed to demonstrate eligibility, under the relevant statutes, to recover the awarded damages from the Fund. Additionally, the ROC contends it was entitled to a hearing before such an order of payment could be entered.

¶ 10 As a preliminary matter, we reject Magness's argument that because it obtained a default judgment against Lendo awarding damages in the amount of $17,461.45 on its Fund claim, the ROC's challenges to Magness's eligibility to recover from the Fund are precluded. As expressly stated in Rule 55(a), default may be entered only against a party who has failed to plead or otherwise defend. Here, the ROC filed an answer challenging Magness's eligibility to recover from the Fund before an application for default was filed. Therefore, no entry of default against the ROC could have occurred and the default judgment against Lendo did not eliminate the ROC's right to object to the subsequent application for payment from the Fund. ²

¶ 11 Under the governing statutes (A.R.S. §§ 32–1132, –1136), however, a party need not secure a judgment against the ROC as a prerequisite to recovering from the Fund. Section 32–1132(A) sets forth the overall eligibility requirements:

The residential contractors' recovery fund is established, to be administered by the registrar, from which any person injured by an act, representation, transaction or conduct of a residential contractor licensed pursuant to this chapter that is in violation of this chapter ... may be awarded ... an amount of not more than thirty thousand dollars for damages sustained by the act, representation, transaction or conduct. An award from the fund is limited to the actual damages suffered by the claimant as a direct result of the contractor's violation but shall not exceed an amount necessary to complete or repair a residential structure.... An award from the fund shall not be available to persons injured by an act, representation, transaction or conduct of a residential contractor who was not licensed pursuant to this chapter or whose license was in an inactive status, expired, cancelled, revoked, suspended or not issued at the time of the contract.

After obtaining a judgment against a residential contractor, the “injured person” may apply to the superior court for an order directing payment from the Fund. A.R.S. § 32–1136(B). If the injured person has given twenty days' notice to the ROC, “the court may direct payment out of the fund either on receipt of a consent to payment signed on behalf of the registrar or, in the absence of any written consent, after the notice period[.]” Id. If the ROC files a timely written objection with the court, however, “the court shall not direct payment from the fund without affording the registrar a reasonable opportunity to present and support its objections.” Id. (emphasis added). Thus, § 32–1136(B) establishes the ROC's procedural rights—notice and an opportunity to be heard in a meaningful manner.

¶ 12 In this case, it is undisputed that Magness timely notified the ROC that it was applying for court-ordered payment from the Fund. In response, the ROC filed a timely written objection to Magness's application for payment, arguing Magness had failed to demonstrate its eligibility. Citing § 32–1131, which defines “person injured,” in relevant part, as “any owner of residential real property ... which is actually occupied or intended to be occupied by the owner as a residence,” the ROC argued that Magness, as a trustee, did not qualify as both the requisite owner and occupier of the property. Moreover, because it is undisputed that Lendo was not a licensed contractor at the time Magness and Lendo entered the first and second contracts, the ROC argued Lendo was not a licensed contractor “at the time the parties enter[ed] into the contract” under § 32–1132(A). In addition, accepting the allegations of Magness's complaint as true, the ROC asserted that Magness's requested damages ($14,067.39) exceeded those permitted by statute because Magness paid other contractors only $8,619.40 to complete the contracted work. Finally, the ROC argued that § 32–1136(B) required the superior court to hold a hearing to address the ROC's written objections before ordering payment from the Fund.

¶ 13 Magness countered that Shelley Magness, as the sole beneficiary of the Trust, qualified as a “person injured” under the statute. Magness did not dispute that Lendo was unlicensed at the time the first and second contracts were formed, but maintained that each of the numerous subsequent change orders was a contract for purposes...